Topic: Weekly FX Report

US disinflation is in full swing and led to the first back-to-back weekly loss of the US dollar since the end of April. Sterling jumped to its highest in a year, boosted by the UK macro backdrop. Another interesting week beckons – on net, we think it could be a dollar negative macro flow.

The tug of war between politics and policy is keeping FX markets on edge. Sterling was unfazed by Labour’s victory, but BoE cuts are coming. Will Biden drop out of the US election and how will Fed easing bets change with the upcoming US inflation report?

Despite signs of the US economy losing steam, the dollar remains appealing due to political turmoil in Europe, Trump rising in the polls, and FX weakness in Asia. The UK’s Q1 growth was upgraded to 0.7%, leading the G7. Meanwhile, USD/CNY is under pressure as Chinese bond yields hit two-decade lows.

Political risk premia in Europe fell slightly this week amid French election concerns, but implied volatility remains high. Lower yields and disinflation have propelled US equity benchmarks to record highs.

Macron’s snap election call, lower U.S inflation, and fewer Fed rate cuts sparked market volatility. U.S bond yields dropped, equities hit highs, and European markets fell. EUR/USD volatility surged, widening the French-German yield spread.

Equity benchmarks in the US and Europe hit record highs before the non-farm report. The surprising 272k job increase reversed US treasury yield declines and reduced rate cut expectations.